聯合太平洋集團 (UNP) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Union Pacific Second Quarter Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded and the slides for today's presentation are available on Union Pacific's website.

It is now my pleasure to introduce your host, Mr. Lance Fritz, Chairman, President and CEO for Union Pacific.

Mr. Fritz, you may now begin.

Thank you, and good morning, everybody, and welcome to Union Pacific's Second Quarter Earnings Conference Call.

With me here today in Omaha are Beth Whited, Chief Marketing Officer; Cameron Scott, Chief Operating Officer; and Rob Knight, our Chief Financial Officer.

This morning, Union Pacific is reporting net income of nearly $1.2 billion for the second quarter of 2017.

This equates to a second quarter record $1.45 per share, which is up 24% over last year.

Total volume increased 5% in the quarter compared to 2016.

Carload volume increased in 4 of our 6 commodity groups, led by a 17% increase in Coal and a 15% increase in Industrial Products.

The quarterly operating ratio came in at 61.8%, which was a record for the second quarter and is a 3.4 percentage point improvement over the second quarter of 2016.

In addition to the increase in volume, positive core pricing and solid productivity were key drivers of the margin improvement.

Guided by our strategic value tracks, our entire team is focused on providing an excellent customer experience while safely and efficiently delivering on our innovative productivity initiatives.

I'm pleased with our results through the first 6 months and look forward to continuing our momentum through the remainder of the year.

Our team is going to give you more of the details on the second quarter, starting with Beth.

Thank you, Lance, and good morning.

In the second quarter, our volume was up 5%, driven primarily by Coal and Industrial Products with offsets in Automotive and Chemicals.

We generated positive net core pricing of 1.5% in the quarter with continued energy related and Intermodal pricing pressure.

Despite these challenges, we remain committed to achieving core pricing gains that offset inflation and align with our value proposition.

The increase in volume and a 6% improvement in average revenue per car drove an 11% increase in freight revenue.

Let's take a closer look at the performance of each of our 6 business groups.

Ag Products revenue gained 7% on both a 3% volume and average revenue per car increase.

Grain carloads increased 11% with continued strength in wheat exports, driven primarily by shipments to the Gulf and Mexico.

Domestic corn volumes were up 5% from increased Midwest processor business and strength in the Mid-South poultry market.

Grain products carloads were down 3%, primarily due to a reduction in soybean oil shipments resulting from soft biodiesel production.

Partially offsetting lower volumes were higher ethanol shipments, driven by strong export demand to Brazil and China.

Food and Refrigerated volumes were up 3%, driven by continued strength in sugar shipments as well as support from a healthy summer demand associated with the brewers and beverage markets.

Looking at the rest of the year, high global production of both feed grains and wheat, coupled with a lower-quality domestic wheat harvest, will create headwinds in our export markets.

As always, we're keeping a close eye on the weather to see what the domestic corn and soybean crop will yield.

We expect food and refrigerated shipments to grow from our cold connect service, sustained strength in sugar and import beer trending with consumer demand.

Automotive revenue was up 5% in the quarter on a 1% increase in volume and a 6% increase in average revenue per car.

Finished vehicle shipments decreased 4%, primarily as a result of softer vehicle sales leading to reduced production and shifting product mix.

These changes were partially offset by new West Coast import traffic and Mexico production growth.

The seasonally adjusted average rate of sales was 16.6 million vehicles in the second quarter, down 3% from second quarter 2016.

On the parts side, over-the-road conversions and growth in light truck demand drove a 2% increase in volume.

The U.S. light vehicle sales forecast for full year 2017 is 17.1 million units, down 2% from the 2016 record rate of 17.5 million.

We remain cautious with respect to auto sales due to current sales trends, high inventory and rising interest rates.

The reduced SAAR will impact both finished vehicles and parts with a potential offset in over-the-road conversion opportunities.

Chemicals revenue was up 4% for the quarter on a 2% decrease in volume and 6% increase in average revenue per car.

Petroleum and LPG shipments declined 20% as we continued to see headwinds on crude oil shipments, which were down 84% to about 2,200 carloads in the quarter due to lower crude oil prices and available pipeline capacity.

Chemicals volume, excluding crude oil, was up 2% in the quarter.

Plastics carloads were up 6% due to low commodity prices, which drove increased polyethylene and PVC shipments.

Fertilizer was up 13%, driven by increased potash exports.

For the second half of 2017, our Chemicals franchise is expected to remain stable, strength is anticipated in plastics with new facilities and expansions coming online.

Coal revenue increased 25% for the quarter on a 17% increase in volume and 7% improvement in average revenue per car.

On a tonnage basis, Powder River Basin and other regions were both up 17% from higher natural gas prices and stronger West Coast exports, which benefited from favorable global economics for western U.S. coal.

Overall, coal stockpiles were down in the quarter and are now below the 5-year average.

Looking forward to the second half of the year, Coal volumes will face tougher year-over-year comps, but we expect absolute volumes to be sustained sequentially if natural gas prices and export demand are maintained.

As always, weather conditions will be a key factor of demand.

Industrial Products revenue was up 24% on a 15% increase in volume and an 8% increase in average of revenue per car during the quarter.

Minerals volume increased 73% in the quarter, driven by a 128% increase in sand shipments due to improving well completion and increased proppant intensity per well.

Specialized Markets volume increased 20% in the quarter, driven by a 29% increase in whey shipments due to West Coast remediation projects.

Looking forward, we anticipate frac sands volumes to stay strong.

Although new in-basin brown sand mines might temper the upside.

We see growth in military and wind shipments with an offset in roofing and cement volumes due to year-over-year comps associated with weather-related reconstruction and changing market dynamics.

Intermodal revenue was up 3% on a 2% increase in volume and a 1% increase in average revenue per car.

Domestic volume grew 2% in the quarter, driven by parcel growth as well as improved truckload market demand in the last half of the quarter.

International volume was up 2% in the quarter from stronger westbound shipments and inventory restocking.

Looking forward, we expect international Intermodal volumes will continue to be impacted by an ever-changing global supply chain.

For the domestic market, implementation of electronic logbooks will provide opportunity for additional over-the-road conversions.

To wrap up, this slide recaps our outlook for the remainder of 2017 mentioned in the previous slides.

Over-the-road conversions will continue to present opportunities for growth.

We also anticipate continued progress in our plastics and food and refrigerated markets.

Our diverse franchise remains well positioned for growth this year as the U.S. economy continues to build momentum in the face of a number of uncertainties in the worldwide economy.

Our team remains fully committed to developing new business opportunities and strengthening our overall customer value proposition.

With that, I'll turn it over to Cameron for an update on our operating performance.

Thanks, Beth, and good morning.

Starting with safety performance.

Our reportable personal injury rate increased to 0.76 versus the first half record of 0.70 achieved in 2016.

The team remains fully committed to finding and addressing risk in the workplace and I am confident in our efforts as we push towards our goal of 0 incidents.

With regards to rail equipment incidents or derailments, our reportable rate improved 4% to 3.01.

While TE&Y training and infrastructure investments continue to be key pieces of our derailment prevention strategy, advanced data analytics will help us make even greater strides towards identifying and mitigating risk.

In public safety, our grade crossing incident rate improved 5% versus 2016 to 2.27 as our grade crossing assessment process and collaboration with the public continues yielding positive results.

Moving on to network performance.

Our network performance fell short during the second quarter, which is reflected in the metrics we report each week to the AAR.

Second quarter velocity was down 5% and freight car dwell was up 4% when compared to 2016.

Severe spring weather across our served territory, along with several service interruptions and outages were the primary drivers of the decline in service metrics.

Looking at our resources.

Although our TE&Y workforce was up about 500 employees in the second quarter when compared to the same period in 2016.

We were able to effectively leverage the robust 5% increase in volume with numerous productivity initiatives we have underway.

Partially offsetting some of this productivity, however, was an increase in workforce to help manage the network disruptions and outages I mentioned earlier.

In addition, our engineering and mechanical workforce was down more than 1,000 employees, driven primarily by fewer employees required on capital projects as a result of the productivity initiatives we have implemented.

All in, our total operating workforce was down almost 600 employees in the quarter or 2% when compared to last year.

As always, we continue to adjust our resources as volume and network performance dictate.

In addition to being agile with our resource base, the team's persistent focus on productivity continues yielding positive results in other areas such as train size.

An example of our relentless focus on productivity is how we have achieved best ever train size in our manifest train category for 8 straight quarters.

Our team uses data analytics to dynamically adjust our service schedules to maximize train length while balancing our customer commitments.

We are also able to generate productivity gains within our terminals as cars switched per employee day increased 5% during the second quarter.

Overall, I am pleased with the productivity we've been able to realize thus far, and I'm looking forward to further improvements as we move forward.

To wrap up, as we move into the back half of the year, we expect our safety strategy will continue to generate positive results on our way to an incident-free environment, and we will continue leveraging the strength of our franchise to improve operational performance with a focus on productivity and providing an excellent customer experience.

With that, I'll turn it over to Rob.

Thanks, and good morning.

Let's start with a recap of our second quarter results.

Operating revenue was about $5.3 billion in the quarter, up 10% versus last year.

Higher volumes, an increase in fuel surcharges and positive core price all contributed to the increase in revenue for the quarter.

Operating expenses totaled $3.2 billion, up 4% from 2016.

The increase in fuel cost represented a majority of the increase to the operating expense in the quarter.

Operating income totaled $2 billion, a 21% increase from last year.

Below the line, other income totaled $43 million, down from about $77 million in 2016, which included a $50 million real estate gain that we reported last year.

Interest expense of $179 million was up 3% compared to the previous year.

The increase was driven by additional debt issuance over the last 12 months.

Income tax expense increased 20% to $701 million, driven primarily by higher pretax earnings.

Net income totaled almost $1.2 billion, up 19% versus last year, while the outstanding share balance declined 4% as a result of our continued share repurchase activity.

These results combined to produce a record second quarter earnings per share of $1.45.

The operating ratio was 61.8%, a 3.4 percentage point improvement from the second quarter last year.

The combined impact of fuel price and the surcharge lag benefit drove a 0.5-point improvement to the operating ratio and a $0.06 tailwind to earnings per share in the second quarter versus last year.

Turning now to the top line.

Freight revenue of $4.9 billion was up 11% versus last year, driven by a 5% increase in volume, along with positive core pricing.

Fuel surcharge revenue totaled $234 million, up $147 million when compared to 2016 and up about $22 million from the first quarter of this year.

The business mix impact on freight revenue in the second quarter was a positive 1%.

The primary drivers of this positive mix were year-over-year growth in frac sand shipments and grain carloadings, partially offset by an increase in Intermodal volumes.

Core price improved to 1.5%.

While we have experienced an uptick in pricing, as expected, we do caution that we are continuing to see competitive pressures in our Coal and Intermodal businesses.

Excluding Coal and Intermodal, pricing in our other business lines was in the 2% to 3% range for the quarter.

For the full year, we continue to be on track with our pricing initiatives to generate a revenue benefit that exceeds our rail inflation costs.

Turning now to the operating expense.

Slide 21 provides a summary of our operating expenses for the quarter.

Compensation and benefits expense increased 3% versus 2016.

The increase was primarily driven by a combination of higher wage and benefit inflation along with higher volume.

We still expect full year labor inflation to be about 5%, partially offsetting higher volumes were solid productivity gains and a smaller capital workforce, resulting in total workforce levels declining 2% in the quarter versus last year or about 800 employees.

Fuel expense totaled $434 million, up 25% when compared to last year.

Higher diesel fuel prices and a 10% increase in gross ton-miles drove the increase in fuel expense for the quarter.

Compared to the second quarter of last year, our fuel consumption rate improved 3% while our average fuel price increased 17% to $1.69 per gallon.

Purchased services and materials expense increased 5% to $597 million.

The increase was primarily driven by volume-related costs, partially offset by lower joint facility expenses.

Turning now to Slide 22.

Depreciation expense was $525 million, up 4% compared to 2016.

For the full year 2017, we estimate that depreciation expense will increase around 4% to 5%.

The increase is primarily driven by higher depreciable asset base, including our positive train control assets put in place to date.

We estimate that depreciation on PTC assets will be approximately $130 million in 2017, increasing to around $150 million in the out years, post implementation.

And with respect to PTC, in addition to depreciation expense, as we have previously mentioned, we expect the remaining expense line items to increase about $150 million to $200 million annually once PTC is fully implemented.

Moving to equipment and other rents.

This expense totaled $273 million in the quarter, which is down 5% when compared to 2016.

Lower locomotive and freight car lease expense and mix of traffic were the primary drivers for the reduction.

Other expenses came in at $219 million, down 10% versus last year.

Lower environmental, personal injury and other costs were partially offset by higher state and local taxes.

For 2017, we would expect other expense to increase slightly, excluding any unusual items.

Looking at our cash flow.

Cash from operations for the first half of the year totaled about $3.5 billion, down 2% when compared to last year.

The decrease in cash was primarily related to a lower bonus depreciation benefit, which more than offset the increase in net income.

Taking a look at adjusted debt levels, the all-in adjusted debt balance totaled about $18.4 billion at quarter-end.

We finished the second quarter with an adjusted debt-to-EBITDA ratio of around 1.9x, which is close to our target ratio of just under 2x.

Dividend payments for the first half totaled $980 million, up from $925 million last year.

In addition to dividends, we also bought back around 15.3 million shares, totaling over $1.6 billion in the first half, an increase of around 26% over last year in terms of dollars spent.

And since initiating share repurchases in 2007, we have repurchased over 30% of our outstanding shares.

In between our dividend payments and our share repurchases, we returned about $2.6 billion to our shareholders through the first half, which represented about 118% of our first half net income.

On the productivity side, our "G55 + 0" initiatives yielded around $110 million of productivity in the quarter.

This is an improvement over the $90 million that we achieved in the first quarter and brings our first half total to around $200 million.

This benefit was realized across 3 major categories.

The first is network and train operations.

This includes things like increasing train length and reducing recrews and other TE&Y related expenses.

The second category is equipment.

This includes efforts such as using fewer locomotives and freight cars resulting in reduced equipment maintenance costs.

And the third category consists of support, supply and safety where there are multiple opportunities ranging from improving fuel efficiency to reducing purchasing and other administrative expenses.

With these results, we continue to progress as expected and we are on track to meet our $350 million to $400 million productivity goal for the full year.

Looking forward, we still expect full-year carloading growth to be up in the low single-digit range.

Third quarter carloads should strengthen somewhat from the second quarter.

Although they will likely be closer to flat year-over-year given the more difficult 2016 comparisons.

And this is particularly true for Coal.

I also want to mention a couple of onetime items that will impact the third quarter.

First, we will see a onetime increase in tax expense totaling about $0.04 of earnings per share to reflect a recent increase in the Illinois state income tax rate.

And on the plus side, we will receive a settlement totaling approximately $0.05 earnings per share as a resolution of an ongoing litigation matter.

This amount will be recognized as other income below the line.

With positive full year volume, positive core price and significant productivity benefits, we are on track to improve our full year operating ratio.

And longer-term, we are intently focused on achieving our targeted 60% plus or minus operating ratio on a full year basis by 2019.

And we remain committed to reaching our goal of a 55% operating ratio beyond 2019 as we continue the momentum of our volume, pricing and productivity initiatives.

So with that, I'll turn it back over to Lance.

Thank you, Rob.

Looking at the second half of the year, we expect uncertainty in some economic sectors and continued strength in others.

Overall, as Rob mentioned, absolute business volumes should be stronger in the second half than in the first half.

Although year-over-year comparisons are going to be more challenging.

In this environment, we'll focus on our growth opportunities.

In addition, we'll continue to make progress on our "G55 + 0" initiatives as we work to make Union Pacific a stronger, more efficient company.

We are confident these efforts will generate top line growth, margin improvement and greater returns for our shareholders.

With that, let's open up the line for your questions.

(Operator Instructions) Our first question comes from the line of Scott Group with Wolfe Research.

So I wanted to just clarify some of the comments on Coal being flat sequentially.

Are you saying that the third quarter average is going to be the same as second quarter?

Because we have never seen that.

So I just -- I'm not sure I follow what you are trying to say.

No, we weren't saying that.

Sorry if that was misinterpreted.

No, we would expect third quarter to follow a traditional pattern and be up sequentially but relatively flat to last year.

Okay.

Flat on a year-over-year basis.

Okay, that makes a lot more sense.

Okay.

And then Rob, just for you on the pricing side.

I know it's not an area where you typically like to forecast specific numbers.

But maybe just some insights, we saw it tick up a little bit this quarter.

Do you think that -- is it reasonable to expect that, that trend of kind of rebound continues into the back half of the year just given the better volume environment or tough to have visibility to that at this point?

Scott, we're going to continue to price to market and drive as positive price as we possibly can.

And as you know, we're going to stay away from giving a specific pricing number other than to reiterate that we expect to yield above inflation dollars.

But we also pointed out, Beth and I both did, that we continue to face pressures in the Coal and Intermodal groups.

So we'll see how all that plays out.

And just given the better volume environment, does the market -- I understand the competitive comments.

Does the broader market feel like it's better from a pricing standpoint, just given you've had a few quarters now of volume growth or you're not ready to say that?

I would say that there are a lot of competitive factors going on out there on the plus side.

We are seeing truck prices just beginning to firm and that gives us some hope that, that will continue throughout the rest of the year, especially with ELDs coming online.

But the other competitive factors that we see in Coal and Intermodal aren't easy.

So you just kind of have to make your own prediction about what you think might happen.

Last, just a quick follow-up.

How about in just Grain with grain prices going up.

How does that impact the way you think about grain tariffs going forward?

Well, let me see how to answer that.

I would say that we certainly want to price and get value in the market at every opportunity.

Grain prices going up will hopefully bring more volume to us and provide us with a revenue opportunity, and we'll have to see how the pricing opportunities play out from that.

Next questions come from the line of Ken Hoexter with Merrill Lynch.

Just following up on the pricing side, on the increased coal pricing you're talking about.

Are there major contracts up for bid that you're seeing this get more intense?

Is this more a commentary on a shift of export coal?

I just want to see as -- given that your easy comps that you had now start to get a little tougher, I want to see where that's heading towards.

Are you asking a volume or a price question?

It's price, but I want to understand what's leading into that price competition.

Is it that you're seeing more new -- or more bids going on right now, major bids that where you're seeing your competitors step up?

Is it because of the export side?

I just want to understand where you're seeing that pricing competition.

I think that we continue to see competition kind of across the book of business.

But we aren't at any sort of an unusual level of contract negotiation during this period.

It's just kind of -- when you think about our whole base and the contracts that we negotiate over time, as we are renegotiating contracts, the market is still very competitive.

Yes.

And nothing on the export?

Is that...

No.

The export business, as you know for us, is relatively small.

And we have had some nice opportunity, but that's not as, I mean, it's certainly still competitive but that's not where we're seeing the most pressure.

Great.

And then for the follow up.

This is great detail, Rob, on the productivity initiatives that you provided here.

Is this -- when you look at the equipment side and the like, is that -- do you see the locomotives -- are you increasing them out that you're parking as far as the productivity and the cars?

Can you talk a little bit about kind of where that stands?

You've given those numbers in the past.

Yes, let's let Cameron address that.

Several years ago, we started an initiative on our low-horsepower fleet and that initiative netted about 500 locomotives we put into storage.

Some of those have been sold.

Some of those were leases that we returned.

We've turned that same group of employees towards our high-horsepower fleet.

And I don't think we'll achieve quite 500.

But there's plenty of opportunity for us to rationalize what we're doing with our high-horsepower fleet.

I want to say Cameron is referencing there from this point forward.

He's already got, what is it, in the neighborhood of 1,000 high-horsepower locomotives in storage as we speak.

Our next question is from the line of Brian Ossenbeck with JPMorgan.

So I just have a follow-up on the positive train control comments.

Rob, that was very helpful to give some more details.

I'm wondering if you could just clarify one thing.

Are those costs included in your long-term OR guidance?

I assume they are, but just want to confirm.

And then we hear a lot about the costs.

But what are some of the benefits maybe, Cam, that you think could just come out of this system when it's fully operational?

Yes.

Let me quickly address the cost question, Brian.

Yes, that -- all of those costs were embedded in our targeted 60% OR by '19 and 55% beyond.

So those are challenges that we have to overcome but they're embedded in the thought process.

And in terms of the benefits?

Cam?

[We're] implemented about 40% of our network at this point.

And the technology is working very well.

So there will always be glitches and bugs that we need to upgrade, but, so far, it's a very solid technology.

As we get fully implemented, we'll be looking for every productivity and efficiency that we can squeeze out of that system.

I don't have anything right now to report to you on that.

Giving you a little bit more technicolor, this is Lance.

The PTC foundation gives you an umbrella of communication capability because of what's required for PTC in and of itself.

And it puts a lot of technology and computing power onto our locomotives that at some point could be used for other purposes in the future.

It's important to note that it's not -- when we think about productivity from the positive train control foundation, we're not talking about taking what already exists and somehow redeploying it in a way that's highly productive.

Whatever we do is likely going to require an incremental either capital or operating expense investment.

And we'll make those decisions based on the returns that would be generated from whatever those projects are.

So it forms a foundation in your mind to think about that foundation as a robust umbrella of communication capability and computing power.

And from that point forward, maybe that's a foundation we can use further productivity.

Okay, great.

That's very helpful.

And just the timing, I know we've got the 1 year extensions, possibly, across the board for the industry.

If you could just remind us, when you -- what's the current prospect for going fully online?

Is that a 2020 event?

We're going to be fully implemented -- or installed and able to implement, that is turn on, on every mile that's required late in 2018.

And in the way the law is written, if we're in that position, then we can basically request of the Department of Transportation an extension to 2020, which we will do because we'll want to use that time to debug the system.

While Cameron has mentioned that the system is operating and is functional and doing what it's intended to do, it still has bugs that rob us precious capacity.

And so we'll want to take those 2 years to continue to debug the system.

Okay.

And then just one quick follow-up on the hiring front.

With some of the teaming up almost the same percent as volume, I realize there is some, like perhaps, onetime items in there.

But just in general, Lance, can you tell us where you're seeing trends in hiring?

There's some pretty big chunks of growth coming in areas that you might be a little bit more regionalized like -- perhaps like Coal, and flat to down in -- slightly in other areas.

So how hard are you finding it to get ahead of those recoveries and meet demand kind of just in time with the training programs you have?

And should we expect this long furlough for the freight recession to really kind of rob you from some productivity as you probably might not get all the same people you had back with maybe a little bit lower level of experience when you do start to hire again?

Brian, let's unpack that in 3 pieces.

The first piece is, you're right.

With TE&Y headcount of 4% in the second quarter versus volume up 5%.

That's not quite the kind of productivity we would expect.

I think that's accountable to the weather and service-related interruptions and a little bit more sluggish network, as Cameron pointed out.

And he and his team are working diligently to get that back.

The second point that you were asking about was overall hiring and what's going on in that world.

Recall, we came into the year with a fair number of TE&Y employees on furlough.

So the first thing we do is we call them back from furlough or from their alternative work and training board service.

We've been doing that and we've also, in certain pockets, had to go out and start up the hiring class.

That's a relatively small amount in comparison to the amount of employees that we're bringing back on furlough.

And in terms of, are we able to find employees when we do need to hire?

The answer is yes.

In the TE&Y craft we have very attractive jobs and in the areas where we want to hire, with maybe 1 or 2 very specific exceptions, we can find the employees that we need.

Next question is from the line of David Vernon with Sanford Bernstein.

Cameron, question for you on the productivity side.

You mentioned there was some network disruptions that added to incremental headcount.

And I'm just wondering if you can kind of dimension that for us?

And then also speak to the ability to kind of keep pushing forward with the some of these train length initiatives and [yard] productivity initiatives as volume growth moderates in the back half of the year?

I'll start with train size.

Our team, as we mentioned, during 8 straight quarters, has demonstrated a capability to find additional opportunities on train size while meeting customer commitments.

And there is, as I've mentioned before, still plenty of headroom in almost every train category in our business, with the exception of Coal.

So there is still a lot of opportunity ahead of us on productivity with train size.

In relation to some of the outages.

Probably the best example I can give you was an unfortunate barge strike to one of our key network lanes in Louisiana.

We've been out for 7 weeks now rebuilding that bridge.

That has caused us to wheel our transportation plan around that outage, adding costs, adding locomotives, adding employees that were not intended as we started the year.

We should get that key route back in service here in the next week, and that will normalize not only our cost structure but our customers will see a more solid service that they expect from us.

And in terms of just sort of dimensioning that in terms of numbers around either extra heads or impact on earnings, is there any way for us to think about what it could have been here in the second quarter versus what it was because of some of these onetime things?

Or is it too small to try to adjust out?

David, let me -- this is Rob.

Let me try to answer -- I mean we're not going to break that out.

I mean it's kind of in the mix.

And we admit, as Lance indicated, that the ratio of 4% versus the 5% volume, is not what we strive for.

But exactly what could it have been is hard to put a fine point on.

Okay.

And maybe this is a follow-up, Beth.

With regards to ELDs, what are you hearing from your intermodal partners and what kind of impact they're expecting from this, not only just in the U.S. implementation, but I also understand there's some speculation that the Mexican government may follow with an ELD set of guidelines into 2018 as well?

Yes, I don't have a comment on the Mexico piece.

I haven't talked to anybody about that at this point.

So that will be a good follow-up for me.

But I think everything you read says that they expect full ELD implementation to be a kind of 3% to 5% sort of capacity impact.

I think some people are skeptical about how well it will be enforced.

And so you've got a range in there in terms of how much impact it will have.

But certainly, we are very optimistic that it's going to help drive some tightening in the truck market and consequential price increases with rate increases in trucks, which will give us an opportunity to convert more volume and, hopefully, get some price of our own.

And we should start to see that into the back half of this year and into next year?

Or is there going to be a bigger lag?

It feels like it's a pretty late in the fourth quarter event and more of a next year item.

Our next question is from the line of Allison Landry with Crédit Suisse.

So frac sand has obviously seen strength in the last couple of quarters.

So I was hoping you could give us an indication of the mix of white and brown.

And I guess more importantly, given some of the expectations for the Permian to be self-sufficient with local brown sand, how do we think about that with respect to your volumes and mix going forward?

So currently, we would say and you can read, different people will say different things that the Permian is roughly 15% brown and 85% white sand.

And there is a demand this year, call it 28 or 29 million tons.

You see estimates going into next year where there are proposed mines that would bring on anywhere from 20 million to 40 million or 50 million tons and perhaps demand in the Permian being in that 40 million to 50 million tons.

I'm not sure how quickly that will happen.

We certainly feel good about Permian white sand this year.

We're working on solutions to try to be a rail provider in the brown sand market as well, and we do a fair amount of that today from other Texas locations.

I -- certainly, it will swing away from white sand as a percentage over, I think, kind of quarter-by-quarter as we move into next year.

We don't really have a prediction for what that looks like for us in 2018.

But like I said, our focus will be on working to support the white sand guys that are continuing to ship and developing alternatives for the brown sand.

Okay.

Got it.

And then if I could ask about the volume guidance.

You obviously gave the expectations for flat year-over-year in Q3.

And it sort of implies a pretty wide range for the fourth quarter.

So wondering if you can help us think through that and maybe handicap whether or not you think volumes could be up in the fourth quarter?

Allison, this is Rob, and we haven't given specific volume guidance for the fourth quarter.

But -- so you're right, it could be a range.

I mean, we're hopeful that the economy will continue to move in the right direction and our third quarter, as I pointed out in my comments, while we envision that being kind of flattish year-over-year, we do see it sequentially growing from where we are today, where we finished in the second quarter.

So stay tuned in terms of how the world plays out in the fourth quarter.

Our next question is from the line of Jason Seidl with Cowen and Company.

Two quick questions.

Rob, wanted to talk a little bit about your comments that we're at that proper level for adjusted debt-to-EBITDA that you look at.

How should we think about your cadence of share repurchases going forward?

Is that going to slow a little bit or you expect to keep it about the same pace?

Well, Jason, as you know, we don't have a set number.

We don't give specific guidance.

It will continue to be opportunistic in terms of the pace at which we buy, so I couldn't begin to give you exactly what that cadence will look like, markets will drive.

But I would just tell you that, in terms of the focus that we have in the organization is driving more cash.

I mean, so as we look at the metric, while we're close to that targeted number, as I pointed out, we still have room to go in terms of generating positive cash in the business.

And that gives us the greatest opportunity to continue to move forward.

Okay.

And I wanted to jump back on your ag outlook a little bit.

Talk about how exports in the quarter impacted the ARC.

So obviously you don't talk about pricing, but let's just talk about the overall ARC from the mix and what should we expect sequentially going forward about exports?

And how that would look against your ARC in the third and fourth quarter?

So in the quarter, we did have strong grain export shipments, especially with wheat.

And obviously, that's a longer length of haul almost all the time.

We do see more -- we did see some pretty low barge prices, so did move a fair amount to the river.

So it impacts our ARC positively but maybe not as much as historically has just because of the river move.

As you move into the third and fourth quarter, you're going to see quite a bit less export grain, particularly in the third quarter because we had a really strong third quarter last year.

And we're now going to be challenged by pretty strong global availability of grain in markets where they have a significant currency advantage.

So it'll -- I would say it would be a negative ARC impact versus last year in the third quarter.

I don't have a sizing of that for you.

Okay, so Beth, so all things being equal, as you look to 3Q and 4Q and comp it versus 2Q, likely going to be down compared to 2Q based on the mix?

The ARC?

I don't know.

I'm sorry.

I don't have a prediction of that for you.

The volume...

Fair enough.

Yes, it's on the export side.

Our next question is from the line of Chris Wetherbee with Citigroup.

I wanted to talk about productivity a little bit and understand maybe the cadence for the back half of the year.

So you have $150 million to $200 million left to go.

And in the first half, you sort of had a stronger performance and a better volume environment.

I guess my question is, as you see sort of volume comps get a bit tougher there, what is that variability in cadence for the back half of the year?

Do you think, if 4Q doesn't turn out to be positive from a volume standpoint are you more likely to be the lower end of the guide?

Just trying to get some sensitivity around that for the second half.

Hi, Chris.

This is Lance.

I'll let Rob speak specifically to the guidance, which was $350 million to $400 million for the year.

But in terms of the mechanics of productivity, Cam and team and the rest of the organization are constantly working the projects that we have in front of us right now.

So that -- Rob pointed out 3 big segments in the transportation side, it's about train length and being more productive in switching and locals.

It can be more productive in our engineering and mechanical workforces where we've got projects underway.

And candidly, we've been very straightforward in saying I think we've got more opportunity to be more productive in our general administrative and support functions.

So you'll see us take action on all of those in the second half of the year.

Yes.

That -- If I can, I would just add, Chris, that as you've heard us comment many times before.

We're not going to stop at the $350 million range.

And we try not to use volume as an excuse.

I mean, certainly, volume is our friend, and it gives us more optionality in terms of the productivity initiatives.

But as we have done for many, many years that -- and that is that we have a mindset that we're still going to aggressively go after the productivity initiatives that Lance outlined that are in front of us that we're aggressively pursuing.

And in spite of what the year-over-year volume is.

And again, we still predict, by the way, our guidance is that volume for the full year is going to be up in the low single digits.

So the fact that it's, say, flattish in the third quarter year-over-year, I don't think that's really going to impact or slow down any of our productivity initiatives.

Okay.

All right.

That's helpful.

I appreciate that.

And then Beth, maybe a question on the Coal side.

So you've given some helpful color around the third quarter.

I guess I just wanted to make sure I understood how you think about sort of finishing out the year relative to what we've been hearing a little bit from the producer side within PRV coal.

And if there is the ability to sort of make commitments to the extent that there's demand there in the fourth quarter depending on what weather does stockpiles do.

I guess our sense is that production levels on the mine level might end up falling sort of short of flattish in the fourth quarter.

I just wanted to get your sort of thoughts around that if you have any.

Well, at this point, we haven't considered that we would have significant production shortages in the fourth quarter.

And we're definitely still thinking it looks flattish.

I suppose it all depends on what plays out in the third -- with third quarter demand and hot weather and if the producers are in a place where it makes economical sense to them, I would guess that they'll keep producing into that.

Our next question comes from the line of Tom Wadewitz with UBS.

Wanted to ask you a little more on the Coal and Intermodal competitive pressures that you highlighted.

I think -- I want to stay with maybe third quarter last year that you first started talking about these pressures.

And we have seen better Coal volumes certainly over the last couple of quarters, I -- in Coal.

What do you think is the dynamic where you might see some of those competitive pressures ease?

Is that really a function where the natural gas price is?

Is it just a market price is lower for coal transport than what your book is priced at?

So it's really a multi-year headwind and repricing to market?

Or, how would we think about kind of the drivers of that competitive pressure?

And how long the duration might be?

It's pretty hard to make any sort of prediction about things that are happening in the competitive market when the person you're talking about isn't yourself.

So I don't probably have any guidance to give you there.

Our focus is just going to be on making sure that we're getting a reinvestable price that makes sense to us as we renew deals and go out to bid for new books of business.

Tom, this is Lance.

Of course, anytime the environment improves from the standpoint of more economic opportunity for all the competition in the marketplace, more volume opportunities.

Anytime that's the case, that's a better environment to compete in.

So we're looking forward to that being the case at some point in the future.

What about the Intermodal side?

I know you had referred in the past about that kind of turmoil with the steamships and the consolidation and obviously with Honda and so forth.

Do you think that the as -- I guess there's more activity going on, do you have any visibility to that stabilizing and maybe pricing in international Intermodal stabilizing?

Or is that something that's probably continues for a while?

I think that the steamship lines are still shaking things out.

And that -- and while I think their economics are better, I don't think they're in a situation where they're making a lot of money and maybe not even making money.

So in that environment, I think the pressure remains for them to try to be very economically competitive in what they do.

So we'll see.

I think that may take a little bit longer to shake out.

Recall, Tom, that those are -- that the moving parts from the standpoint of sometimes those consolidations or partnerships benefit us and sometimes they don't.

Regardless, we take that competitive landscape and compete for the business that makes sense to us from our -- from an economic return and compete aggressively for it.

Great, great, okay.

And then just a quick follow-on.

On the chemicals side, what's the timing when you really see the impact from the new plants?

Are you already seeing that?

Or is there kind of a time frame when it would be a bigger volume impact from the new production coming on in the Gulf?

Yes.

So it's going to be kind of a slow start, I think.

You start to see, I think, 1 or 2 plants really making meaningful production in 2017, and that's really pretty late in the year, and with 2018 being a more significant impact.

Our next question is from the line of Amit Mehrotra with Deutsche Bank.

Wanted to ask you on the outlook for the back half.

You do typically see a nice step down in OR sequentially.

But obviously, there's some difficult comparisons, as you mentioned, possible mix challenges as well.

Can you just talk about the puts and takes there and maybe your confidence or the company's ability to actually lower OR sequentially against that backdrop?

Yes.

Amit, this is Rob.

I mean, we're not going to give specific quarterly OR guidance.

You're right, traditionally, that's the way it plays out.

There's a lot of moving parts.

We'll see what mix does.

It's been favorable thus far this year.

We're going to continue to drive pricing as Beth has talked about.

We're going to continue to be aggressive on our productivity initiatives as we've all talked about, and those are the levers.

And volume, we think, is going to be our friend.

It's certainly, in the third quarter, improving from the second quarter.

And we'll just have to see how the numbers play out.

But again, we're confident and pleased with the progress we have made thus far this year and confident in our ability to improve the operating ratio year-over-year.

Okay.

Maybe just if I could have a follow-up and just be a little bit more specific as it relates to maybe the automotive business and also the chemical business as it relates to the auto production.

I mean, North American light vehicle production is expected to be down about 6% in the third quarter.

I think some of that, obviously, has to do with the big 3 changeovers that maybe you're not as exposed to versus the eastern rails.

And then if I'm not mistaken, there are significant amount of chemical carloads that are also tied to auto production.

So if you could just help us think about both the auto and chemical franchise in light of maybe the sharp drop-off in production and maybe the impact to mix there?

So we have seen strength in plastics this year on the PVC and PE side, which -- and PP is really the stuff that goes into auto.

So I would agree with you that there's been a little bit of an impact there.

It hasn't been a very significant falloff in PC but the strength is really coming on the PVC and the PE side.

And I don't think that would be something that we would probably be in a situation where we're calling out later in the year.

On the straight auto side, it does feel like there's weakness there and that, that will continue throughout the rest of the year and we'll just have to see if the consumer goes back and starts buying cars or not.

Bear in mind, we have an opportunity still, and it's a significant opportunity, to penetrate further inbound truck for auto parts to auto manufacturing.

In fact, there's still plenty of opportunity to convert that to an intermodal or boxcar product.

And as our -- the second quarter demonstrated, I think our finished vehicles were down 4% but auto parts were up 2%.

We expect to keep going after that in the second half of the year.

Our next question is from the line of Brandon Oglenski with Barclays.

Lance, I wonder if you could just give your investors a little bit of confidence here cause we've been hearing a lot about precision railroading and how that can drive significant improvement at one of your peers.

But you guys have had some pretty significant OR targets out there for some time now.

So can you tell us just what are the drivers to achieve the 60% OR and then even beyond the 55%?

And how confident are you today versus maybe a couple of years ago?

Let's start with my confidence level, which is, it's never been higher.

That's -- it's really wonderful to be speaking to your question coming off the quarter that we've just had where we've demonstrated, on what I would consider relatively modest volumes, an ability to generate significant operating ratio improvement and productivity.

So let's talk about how we're generating that productivity.

Getting just a little bit deeper on those 3 areas that Rob and Cam talked about.

When you're thinking about the train network, what we've been doing to this point is we've been taking our -- the way our plan is organized and deconstructing it by lane, looking for opportunities to grow train size while maintaining the fundamental aspects of the plan, with an eye towards making sure that our customer service product is as good as it possibly can be, the best in the marketplace.

As we look forward, there's an opportunity to comingle some of those service products.

And we're investigating that as we speak, thinking through what does that mean from a service product perspective and a productivity perspective.

We think there's pretty good juice there.

And -- so while we've done a great job of growing train size to this point, we think there's some incremental opportunity as we look forward in our train network.

When we think about how we conduct ourselves with our mechanical, our carmen employees, our craft professionals in the engineering world and some of the contracting work that we do in both, there's plenty of opportunity and we've got projects in all of those areas looking for ways to take out, for instance, leased and rented equipment, contracting work that just is not high value-add or can be done more efficiently, and more efficiently finding ways to invest in equipment that allows us to be way more productive on labor component and have a really attractive return on that investment.

And then when you think about our ability to generate more productivity on the general and administrative and support cost side of our world, and inclusive of purchasing material and supplies, we've been making great progress in those areas and there's lots of opportunity to come.

We've got plans and clear-ride opportunities there that we're developing and ultimately we'll be taking advantage of.

So as we sit here, the team could not be more confident in being able to achieve a 60% plus/minus operating ratio by 2019.

And of course, we're going to do that as quickly as we can.

And then we're -- immediately thereafter, we're just going to keep it up on our way to a 55% operating ratio, again, as soon as we can.

Another thing that gives us confidence is looking backward at our track record.

We've had some fits and starts here recently, mostly driven by significant volume drops.

But in -- even in that context, we've had good solid operating ratio improvement over a very long period of time.

And we've demonstrated we know how to do it.

We're going to keep doing it.

Well, Lance, I appreciate that.

It's -- How should investors though think about the sustainable rate of improvement on the margin?

And you did talk about growth in those comments as well.

I mean, how contingent is this on growth?

Are there still absolute cost buckets that you think you can attack over the next couple of years that would help drive margins higher and the OR lower?

Yes.

So we talk, Brandon, about 3 buckets that drive our OR improvement: pure productivity whatever the volume is, and we will continue to get that; price, which is related to what the value is that we're bringing to our customers and how we are competing in our markets, and we'll continue to generate that; and growth.

Growth certainly helps.

And we're looking for ways and markets, either new ones to penetrate, more business with existing customers, greater geographic reach, however we can maximize the franchise that we have.

We will be pulling the levers on all 3 of those areas all the time as we move forward.

And it just depends on what the economy brings to us, what we're able to do as to exactly the role with each lever plays going forward.

Our next question comes from the line of Walter Spracklin with RBC Capital Markets.

So just following up on your -- on those 3, Lance, and going into pure productivity.

You've got a long-term target, you kind of -- of the mid-50s and up at around 62 now.

What is the time frame?

I mean, just ballpark.

Is this a 2-year, 3-year, 5-year kind of productivity attack?

Is this something you can front-end load?

Are there projects that you're looking on that you're about to pull the trigger on that can really lead to a revamping of the infrastructure that you have right now that applies to the business you run?

Is there anything that you can give us like tangibly that we can kind of look in our models and maybe not out obviously to 2019 when you hit 60 but out within a reasonable time frame after that to be at that mid-50s?

Is there anything you can point us to?

Yes.

I'm not sure I'm going to be very helpful in building out the model for you.

I'll tell you we're going to get there just as quickly as we can.

And as we sit here and look at the different opportunities we have in front of us, the projects that we've already got launched are the ones that we're defining prior to launch.

There's plenty of opportunity, and some of those might surprise us and deliver outsized productivity rapidly and some might be a lot more pick-and-shovel work that takes a bit more time.

I can tell you we're scanning the environment regardless of industry, whether it's other railroad peers or any other competitors or customers of ours to find ideas that we can implement in our own environment to both accelerate our productivity and to generate productivity.

So...

And is there anything in that scanning that might lead to a step function move?

Like a complete overhaul of hump yards and slashing them by -- or are your hump yards, in your opinion, fully utilized?

Are -- is there anything that you think that your scanning might lead to a not a gradual but a step function move in your infrastructure?

Yes.

We're going to learn from everything we see and observe and deconstruct it and see if it makes sense for our network and our franchise.

I'll just remind you that, on our network and franchise, we have a very robust manifest product.

It requires a fair amount of car switching and our lowest cost car switching for us happens to be in our highly utilized hump yards.

So at this point, as we look forward, I'm not so sure you're going to see a lot of change in that area.

Plus, you might see change in other areas like how we define our networks and products and perhaps the commingling of some of our service products so that we can both generate a better service product for our customers and more productivity for our shareholders.

Bear in mind, we've got 4 stakeholders and we're serving them all at the same time: our customers, our employees, the communities that we serve in and you, our shareholder.

Moving on to this other bucket, which is pricing.

Now you've noted that, you're kind of excluding some of the problem areas in Coal and others, you are booking 2% to 3% pricing, which is great.

In the problem areas, you -- these tend to be -- you're going to be affected by contracts that have been signed that will probably have some long tail length to them.

Two questions on that.

When do those start coming off, the ones that are keeping your pricing down in those problem areas?

And at this point, are you booking new contracts in those problem areas above that depressed level in prior periods?

So I don't think we are going to give any real guidance on past or future pricing and specific contracts.

But what I would tell you is the competition is as fierce today in Coal and Intermodal as it has been over the last, I guess, we've been talking about this for about a year.

So that's kind of where we are.

The next question comes from the line of Justin Long with Stephens.

So you said earlier that Coal volume should be about flat year-over-year in the third quarter.

And that translates into a sequential improvement of about 20% in Coal volumes.

And that's really all the sequential improvement you need to get for consolidated volumes to be flat on a year-over-year basis in 3Q.

So I guess saying it another way, it basically implies that non-coal volumes stay flat sequentially.

With that in mind, could you just give some more color on non-coal volume sequentially?

And what you're expecting to get better and what you're expecting to get worse in 3Q?

Rob, do you want to take the guidance part of that, please?

Yes.

Justin, I would just say you may be taking too fine of slide rope to the -- what we talked about.

Coal, we're giving sort of a directional comment on our overall volumes and on Coal.

I wouldn't take that as literally as you have because the factors that will drive coal demand will continue to be gas prices, weather, economy.

I mean, all those factors that could change exactly what the cadence is in the third quarter.

So I mean, our other -- so our guidance, again, to Lance's point, our guidance all-in is kind of flattish.

It could be either side of that, we'll see.

We want to be as high as possible but flattish year-over-year but sequential improvement from here.

And Beth, you want to just maybe talk a little bit about other markets and what's going on?

Yes.

So there'll be ins and outs in all other markets.

There always are.

I'd just remind you, ag was pretty strong last year and so the third quarter is a tough comp for that and all the other markets are going to continue to evolve as we move through the quarter.

And -- but as Rob said, we expect to be flattish.

Okay, that's helpful.

And then maybe secondly, Kansas City Southern has talked a lot about the refined product opportunity in Mexico.

And it sounds like those shipments have picked up in the second quarter for their business, do you see this as an opportunity for your network at all?

Or just from a geographic standpoint, is this not really a needle mover?

It's a small and emerging market for us right now.

We are doing a reasonable amount of traffic.

I wouldn't call it substantial amount of traffic in finished fuels into Mexico both in partnership with the KCSM and with the Ferromex.

And we were probably a big mover early into the LPG space.

And we are still seeing a lot of propane moving into Mexico.

The finished fuels have been a little slower to take off because there's not a lot of terminal infrastructure in Mexico to handle them.

But we see it as a reasonable opportunity over the period until more infrastructure is built in Mexico.

Justin, I would remind you and all of our listeners at this point, we enjoy a robust franchise to and from Mexico.

Because we serve all 6 major rail gateways, we enjoy about 70% of all rail cross-border traffic to and from Mexico.

So we will get our fair share.

The next question comes from the line of Keith Schoonmaker with Morningstar.

I'd like to ask a question on your model.

In your presentation, you mentioned parcel growth.

I don't know that I've seen that called out a lot in the past but -- as a driver for the quarter.

Could I ask for some elaboration on this?

Broadly, how material are parcels to your franchise?

It's trending upward rapidly in line with B2C and online fulfillment.

And can you elaborate on maybe challenges or investments you've had to make to service?

Yes.

So we think about our business in domestic and international, and then within the domestic space, there's kind of truckload and premium and parcel would fall into that premium segment.

And we have seen some nice growth in it.

I think a fair amount of that is being driven by e-commerce.

And so that's enabled us to participate in that, and it's been pretty exciting for us.

In terms of investments that we've had to make to support it, we've been able to utilize, to a pretty significant extent, the facilities that we already had in place for intermodal shipments, and we also do support it from time to time with additional train starts if that investment makes sense for us.

So that's where we are at this point.

It's been a fun market for us to watch emerge.

Good.

As a follow-up, my second question, I guess, maybe this is for Cameron.

A lot of times when we see a big volume influx like we've seen the last couple of quarters in Coal or this quarter in international -- in industrial products, it can compromise margins, yet you've handled it pretty deftly and actually set records in margins.

Is this simply more train starts and you had available locomotives and personnel furloughed?

Or maybe you could elaborate on some of the challenges in bringing that volume on so rapidly?

It is always our stated objective to take Beth's volume and layer it on top of our current train start network.

And as I mentioned before, there is lots of headroom in almost every train category that we have to continue to do that.

The coal marketplace for us in train size is fairly optimized.

There are still opportunities but it is fairly optimized.

So really in stepping up to the plate with beautiful volume growth from Beth in Coal is making sure we're matching appropriate manpower planning and locomotive planning to handle the volumes as they come online.

And I think we've accomplished that very nicely here in the second quarter.

Probably Industrial is a lot more complex than Coal, many more destinations and origins than somewhat repeatable business in the Coal franchise, though.

Is this simply having ample capacity to add lengths to trains, Cam?

Yes, it is.

And you are correct.

That does become very complex very quickly.

And our service design team and our network planning team has done a very nice job, whether it's a regional opportunity or a big system network opportunity to take that growth and layer it right on top of our current program.

Our next question is from the line of Jeff Kauffman with Aegis Capital.

A lot of my questions have been answered.

So let me just ask one on utilization.

I think we understand a lot of the factors that impacted the West Coast flow-through in terms of terminal dwell and average train speed.

You briefly mentioned it in your comments today.

Can you talk about where you are in getting that to the levels you want to?

And at what point do you think we start to see more positive year-on-year comps in those 2 areas?

Cameron?

You're absolutely right.

In the first quarter, with the Western region impact, we took a pretty substantial hit on both velocity and car dwell.

Largely, that velocity in the Western region has returned to us.

It's been a little -- taken a little bit longer for us to recover in the Western region than we anticipated.

But we feel confident, in the second half, the Western region will start delivering the extra velocity and improved [terminal] performance that we expect out of them.

The Southern region, as I mentioned, has a bridge outage that will be resolved here in a week.

They also have very heavy renewal capital programming.

So it makes it a complicated network down south.

As soon as we get that bridge back in service, we anticipate the Southern region will come right back to anticipated velocity as well.

One follow-up to that.

I could be wrong on my statistics here, but I seem to remember when the weather gets below a certain temperature, you got to slow trains down because the rails get brittle.

When the weather gets above a certain temperature, you got to slow trains down because the track gets soft.

We've had some pretty extreme weather this quarter, particularly in the South and Southwest.

Is any of that impacting the system?

And can you discuss whether I'm off target on that?

No.

You are correct.

Heat orders are applied when we reach certain temperature thresholds, and it has been a nice warm summer.

About the only area of our business where that becomes impactful is when you're looking at high-premium intermodal product.

That does tend to retard the maximum train speed that you'd like to run when it comes to that high-premium intermodal product.

The rest of the network is largely unaffected by those heat slow orders.

Jeff, the other aspect of heat is we're an outdoor business.

So we've really got to help our craft professionals kind of watch their health when it gets to temperatures like we're in right now.

And that can slow down work to some degree because they've got to make sure they take breaks.

They got to get out of the heat, be able to keep their body temperature reasonable.

And you can just imagine working 8 or 10 or 12 hours in the kind of environment we have now.

That can have an impact on an individual's productivity.

The next question comes from the line of Bascome Majors with Susquehanna International.

The operating cash flow was down about 2% year-to-date on mid-teens growth in net income.

Can you just walk us through if anything there is timing related and kind of how you expect that to shake out relative to net income for the full year?

And then maybe a similar comment longer term.

Do we expect to grow cash flow in line, maybe a little better than, a little worse than net income over time?

Yes, Bascom.

There was a timing issue when you look at year-over-year.

You're right, the reported numbers show it down.

There was, call it, $400 million year-over-year delta on the bonus depreciation.

And that is kind of front-end loaded for this year.

So we'll see how it kind of plays out for the balance of the year.

But longer term, our goal is to continue to drive that number positively, clearly.

And we have every expectation that given all of the productivity initiatives we have underway that, that will be a very strong pace.

Thank you.

This concludes the question-and-answer session.

I will now turn the call back over to Lance Fritz for closing comments.

Thank you very much, and thank you all for your questions and interest in Union Pacific.

We look forward to talking with you again in October.

Thank you.

Ladies and gentlemen, thank you for your participation.

This concludes today's teleconference.

You may disconnect your lines and have a wonderful day.